Securities Appellate Tribunal
Chandrasen Ganpatrao Bhise vs Sebi on 2 March, 2022
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order reserved : 21.02.2022
Date of Decision: 02.03.2022
Misc. Application No.417 of 2020
And
Misc. Application No.486 of 2020
And
Misc. Application No.556 of 2021
And
Appeal No.424 of 2020
Chandrasen Ganpatrao Bhise
Gopal Niwas, Plot No.14,
Room No.4, 1st Floor, Sion (West),
Mumbai - 400 022. ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, 'G' Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400051. ...Respondent
Ms. Shradha Achliya, Advocate i/b. Jinal Garasia for the
Appellant.
Mr. Shyam Mehta, Senior Advocate with Mr. Mihir
Mody, Mr. Arnav Misra and Mr. Mayur Jaisingh,
Advocates i/b. K. Ashar & Co. for the Respondent.
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CORAM: Justice Tarun Agarwala, Presiding Officer
Justice M.T. Joshi, Judicial Member
Per: Justice Tarun Agarwala, Presiding Officer
1.The present appeal has been filed against the order dated 31st July, 2020 wherein the appellant has been directed to pay a penalty of Rs.20 crores to be paid jointly and severally alongwith the other noticees under Section 15HA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the 'SEBI Act') for violation of Section 12(1B) of the SEBI Act read with Regulation 3 of the Securities and Exchange Board of India (Collective Investment Scheme) Regulations, 1999 (hereinafter referred to as the 'CIS Regulations') and Regulation 4 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (hereinafter referred to as the 'PFTUP Regulations').
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2. The facts leading to the filing of the present appeal are as follows. In 1997, Pancard Clubs Ltd. was incorporated as an unlisted public limited Company. The Company floated various time sharing schemes i.e. selling of rooms for a fixed duration of nights/days depending upon the scheme opted by its customers. The shareholding pattern of the Company was as under:
Sr. Name of Shareholder No.of shares % of No. shareholding
1. Mr. Sudhir Moravekar 500,100 99.78%
2. Smt. Viidya S. Moravekar 600 0.12%
3. Mrs. Manda M. 100 0.02% Phatarpekar
4. Mrs. Usha S. Tari 100 0.02%
5. Mrs. Sharmila S. Hadkar 100 0.02%
6. Mrs. Shobha R. Barde 100 0.02%
7. Mrs. Tejashree Arun Tari 100 0.02% 501,200 100%
3. From the above it is clear that Mr. Sudhir Moravekar held 99.78% of the shares and was practically running the business.
4. On 22.6.2000 the Company addressed a letter to RBI enquiring whether its time sharing business would 4 be covered under its regulatory jurisdiction. RBI responded vide letter dated 10th July, 2000 intimating the Company that its business does not fall within RBI's jurisdiction. Thereafter, on 27th February, 2001 the Company addressed a letter to SEBI outlining the terms and structure of its schemes in order to ensure that the Company was not accidentally carrying out a Collective Investment Scheme (CIS). Another letter dated 20th June 2002 was addressed to SEBI seeking guidance and clarity on the issue as to whether its time sharing business was governed by any SEBI Regulations.
5. It is contended that SEBI did not raise any objection between 2002 to 2010 and inspite of letters written no response was given by SEBI. Accordingly, the Company presumed that it was carrying a legitimate time sharing business which was not regulated by any regulations framed by SEBI. As many as 19 schemes 5 were floated by the Company between 2001 and 2010. Many of these schemes were also discontinued during this period. The Company by way of abundant precaution also took legal opinion from various legal luminaries who opined that the time sharing business was not a CIS.
6. On 30th September, 2010, the appellant was appointed as an Independent Non-executive Director in the Company. It is contended that before joining the Company the appellant exercised due diligence to ensure that the Company was carrying on its business within the framework of law. It is further contended that the appellant upon perusing various documents, letters which were given to SEBI etc. came under a bonafide belief that a legitimate business was being carried out by the Company.
7. In 2010/2011 SEBI conducted a scrutiny and thereafter came to a conclusion that the Company's 6 time sharing activities was not a CIS. In this regard, SEBI addressed a letter dated 2nd February, 2013 to MCA stating that the Company did not fall under SEBI CIS Regulations.
8. On 2nd July, 2013, a complaint was filed by a former Member of Parliament alleging that the Company was carrying on a time sharing business in the garb of a CIS. SEBI replied to this MP on 21st October, 2013 intimating that they had examined the matter of the Company and had concluded that the same did not attract SEBI CIS Regulations.
9. However, SEBI again re-examined the matter and on 26th June, 2014 a show cause notice and thereafter on 10th June, 2016 a supplementary show cause notice was issued alleging violation of the provisions of Section 12(1B) of the SEBI Act read with Regulation 3 of CIS Regulations and Regulation 4(2)(t) of the PFUTP Regulations. During these adjudication 7 proceedings, an ex-parte order dated 31st July, 2014 was passed directing PCL to stop all their businesses. This order was challenged in an appeal before this Tribunal by the Company and its Directors. By an order of 17th September, 2014 the ex-parte ad-interim order dated 31st July, 2014 was set aside and SEBI was directed to decide the matter on merits. Subsequently, SEBI carried on an examination and based on its examination report issued the supplementary show cause notice dated 10th June, 2016. The Adjudicating Officer after considering the replies of the noticees including the appellants came to the conclusion that the Company had violated Section 12(1B) of the SEBI Act and the appellants and other Directors had violated Regulations 4(2)(t) of PFTUP Regulations and, accordingly, imposed a monetary penalty of Rs.20 crores to be paid jointly and severally by the appellant, the Company and its Directors.
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10. The charge against the Company in a nutshell is that the time sharing scheme offered by the Company to the public/investors was a Collective Investment Scheme and that the Company could not sponsor or carry on any Collective Investment Scheme unless it obtains a certificate of registration from SEBI in accordance with the CIS Regulations which had not been obtained. In so far as the Directors were concerned including the appellant, the charge was that as Directors they were responsible for the affairs of the Company and had illegally mobilised the funds by fraudulent or unfair trade practice which was violative of Regulation 4(2)(t) of the PFUTP Regulations.
11. The appellant and other noticees submitted a reply contending that the time sharing business was not a CIS and that the mobilisation of funds was not an illegal act and that SEBI was aware right from the very inception and that no objection was taken by them. 9 Further, SEBI itself had opined that the time sharing business of the Company was not a CIS and, therefore, at a later stage cannot turn around and allege that the Company and its Directors were carrying out an illegal mobilisation of funds.
12. In so far as the appellant is concerned a specific plea was taken that he was an Independent Non- executive Director and was not involved in the day to day affairs of the Company and that no role was assigned to him with regard to the time sharing business and, therefore, the appellant had not violated Regulation 4(2)(t). The appellant further contended that most of the schemes launched by the Company were prior to the appellant joining as an Independent Non-executive Director.
13. The Adjudicating Officer after considering the material evidence on record came to the conclusion that the Company had violated Section 12(1B) of the 10 SEBI Act and that all the four conditions of Section 11(AA)(2) were present in the time sharing scheme run by the Company and, therefore, the said scheme was a Collective Investment Scheme which was violative of Section 12(1B) of the SEBI Act since it was not registered under the CIS Regulation. The Adjudicating Officer further found that the Directors including the appellant were responsible for the conduct of business and failed to give evidentiary proof that they are not officers in default nor filed any evidentiary proof to show that they did not attend the board meeting when the scheme was launched and, therefore, all the Directors are officers in default and are responsible for the illegal mobilisation of the funds and have violated Regulations 4(2)(t) of the PFUTP Regulations.
14. We have heard Ms. Shradha Achliya, Advocate for the appellant and Mr. Shyam Mehta, Senior Advocate assisted by Mr. Mihir Mody, Mr. Arnav 11 Misra and Mr. Mayur Jaisingh, Advocates for the Respondent.
15. In so far as the finding of the Adjudicating Officer that the time sharing business of the Company is a Collective Investment Scheme we find that the same issue was held against the Company by the Whole Time Member which order was challenged in appeal by the Company and its Directors including the appellant before this Tribunal and which order was affirmed. That order has become final inter se between the parties and, therefore, no further arguments were raised on this issue by the appellant.
16. The only contention raised by the appellant is, that the finding that the appellant has violated Regulation 4(2)(t) of the PFUTP Regulations is patently erroneous. In order to address this issue it would be appropriate to extract provision of Regulation 4(2)(t) as it was existing at the relevant moment of time. 12
"4. Prohibition of manipulative, fraudulent and unfair trade practices (1) ..........
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:--
.............
(t) illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any collective investment scheme by any person."
17. The aforesaid provision creates a deeming fiction that dealing in securities would be fraudulent or an unfair trade practice if it involves fraud in the illegal mobilisation of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any Collective Investment Scheme by any person. Thus, the deeming fiction of dealing in fraudulent or an unfair trade practice will kick in only if it involves fraud. Fraud has been defined under Section 2(c) of the PFUTP Regulations which means:
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"Definitions
2.(1) In these regulations, unless the context otherwise requires-
........
(c) "fraud" includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include--
(1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment;
(2) a suggestion as to a fact which is not true by one who does not believe it to be true;
(3) an active concealment of a fact by a person having knowledge or belief of the fact;
(4) a promise made without any intention of performing it;
(5) a representation made in a reckless and careless manner whether it be true or false;
(6) any such act or omission as any other law specifically declares to be fraudulent, 14 (7) deceptive behaviour by a person depriving another of informed consent or full participation, (8) a false statement made without reasonable ground for believing it to be true.
(9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price.
And "fraudulent" shall be construed accordingly; Nothing contained in this clause shall apply to any general comments made in good faith in regard to--
(a) the economic policy of the government
(b) the economic situation of the country
(c) trends in the securities market;
(d) any other matter of a like nature whether such comments are made in public or in private;"
18. A perusal of the definition of fraud means that where a person induces another person or connives 15 with him or misrepresents or conceals material fact or deceives would be a fraud.
19. In the instant case, we have gone through the entire impugned order and we do not find any finding to indicate that the appellant committed a fraud in the mobilisation of the funds. In the absence of any finding of fraud the charge of violating Regulation 4(2)(t) of the PFUTP Regulations cannot be proved. We are satisfied that in the absence of any finding of fraud against the appellant there is no violation of Regulation 4(2)(t) committed by the appellant.
20. Further, Regulation 4(2)(t) provides illegal mobilisation of funds. The impugned order does not show any iota of evidence that the appellant was involved in the illegal mobilisation of funds after he joined as a Director. Admittedly, the appellant was appointed as a Director in 2010. Majority of the schemes floated by the Company was already launched 16 prior to the appellant's appointment as a Director. There is no finding by the Adjudicating Officer that such and such scheme was launched during the period when the appellant became a Director nor there is any finding that the appellant was responsible in the mobilisation of the funds under those schemes.
21. The finding that no evidentiary proof has been filed by the appellant that he is not an officer in default or that he did not attend the board meeting when such scheme was launched is patently erroneous. The burden has wrongly been placed upon the appellant. A charge has been levelled against the appellant, namely, violation of Regulation 4(2)(t). The responsibility to prove the charge is upon the prosecution, namely, upon SEBI. It is for the respondent to prove that the appellant was an officer in default or that he attended the meeting when a scheme was launched. It cannot be presumed that the appellant must have been present in 17 the meeting of the board of directors when the scheme was launched. We are satisfied that in the instant case SEBI has failed to discharge its burden.
22. In any case, the finding of the Adjudicating Officer that the appellant and other Directors are officers in default is totally misplaced. Under Section 5(g) of the Companies Act, 1956 all Directors can be treated as officers in default only when there is a finding that there was no Managing Director or designated person who was responsible for the mobilisation of the funds. We find that there is no finding that the Company did not have any designated person or Managing Director and, therefore, all Directors would be deemed to be officers in default. In this regard, the decision of this Tribunal in Sayanti Sen v. SEBI, appeal no.163 of 2018 dated 9th August, 2019 is fully applicable. The relevant portion of the same is extracted hereunder:
"10. Before proceeding further it would be essential to extract a few provisions of the 18 Companies Act. For facility, Section 5 and Section 73 of the Companies Act is extracted hereunder:-
Section 5 "Meaning of "officer who is in default"
5. For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression "officer who is in default" means all the following officers of the company, namely:
(a) the managing director or managing directors;
(b) the whole-time director or whole-time directors;
(c) the manager;
(d) the secretary;
(e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act;
(f) any person charged by the Board with the responsibility of complying with that provision:
Provided that the person so charged has given his consent in this behalf to the Board;19
(g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors:
Provided that where the Board exercises any power under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form."
12. The usual pattern in economic legislations is that when an offence is committed by a company, the liability is not imposed on all the officers of the company en bloc. Those who are guilty are generally sorted out from those who are not guilty. The Companies Act, however, makes a slight departure from this conventional pattern. It gives an opportunity to the board of directors to distribute the work as between the members of the board or to appoint a managerial person like managing director or whole time director or manager. If nothing of this sort is done, only then the whole board is liable to be prosecuted.
13. As per Section 5 of the Companies Act it becomes clear that a managing director, whole time director, manager, secretary and any person who has been authorized by the board or by any director are now officers in default. Section 5(g) of the Companies Act makes it apparently clear that if there is a managing director appointed in a company, he would be an officer in default.
Further, in the absence of any managing director, 20 if the board has specified any particular director or manager or any other person as an officer in default in which case only that specified director or manager etc. as the case may be would be an officer in default. 14. Section 5(g) of the Companies Act further provides that apart from the directors any officer can also be penalized if his role can be attributed to be an officer in default. If any officer has played some role in bringing about the default or he might have performed the duties assigned to him then he could be penalized as an officer in default. Section 5(g) of the Companies Act thus makes it clear that in the absence of any managing director or any specific order of a board, then by a deeming fiction, all the directors of the company would be officers in default."
23. We also find that the charge of illegal mobilisation against the Directors is patently erroneous. Till 2013 SEBI itself was under a belief that the time sharing business carried by the Company was not a Collective Investment Scheme but a legitimate business. This fact is not only admitted by SEBI but is also recorded in the order of this Tribunal while setting aside the ex- parte ad-interim order. The said finding are extracted hereunder:
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"13...It is important to note that the Respondent admits in its counter affidavit that prior to 2013, SEBI was of the view that time share schemes did not come within the purview of Section 11AA of the SEBI Act.
...........
20. The Respondent submits that prior to 2013 it was of the view that time share schemes were not covered by Section 11AA of the SEBI Act and hence did not constitute a CIS. The Respondent came to this conclusion via a macro examination of the activities of the, as opposed to an in-depth micro examination of every scheme of the Appellant individually. However, a development took place in the law related to Section 11AA when the Hon'ble Supreme Court, in the matter of PGF Limited observed that Section 11AA of the SEBI Act would not be restricted to any particular type of commercial activity, and any scheme floated by a particular company would be capable of being construed as a CIS as long as that scheme satisfied the conditions prescribed by Section 11AA. Moreover, Mr. Mehta submits that estoppel lies against governmental action. ...............
30. One of the issues before us today is whether there were any emergent circumstances justifying an ex parte interim order against the Appellant by invocation of process under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992. Before analysing the nature of powers conferred by the statute on the Respondent by Scheme of Section 11 of the 22 SEBI Act, 1992, we deem it fit to deal with certain undisputed facts which have come to light during the course of the matter. Firstly, on February 27, 2001, the Appellant itself approached SEBI to seek clarification regarding the applicability of CIS Regulations to the Appellant's membership scheme. Then again on June 20, 2002, the Appellant, after providing SEBI with details of its business asked for SEBI's advice on whether or not its activities fell within the purview of a CIS. It is also a matter of record that SEBI did not clarify the situation in any manner whatsoever for shocking period of around 8 years. SEBI in its letter dated October 21, 2013 wrote to MP Mr. Patil that the Appellant's activities did not satisfy the conditions of Section 11AA of the SEBI Act and therefore, none of the schemes time sharing business fell within the ambit of a CIS. A perusal of the original files produced by SEBI as well as that of Reply-Affidavit filed by it undoubtedly points out that the Respondent had taken a view on file that the time sharing business does not fall within the definition of CIS. This view was nurtured by the Respondent till it was changed as a result of either the judgment in the case of PGF Ltd. by the Hon'ble Supreme Court on 12th March, 2013 and/or the intervention of MP Mr. Patil by a letter dated 2nd July 2013 calling upon SEBI to investigate the case of Appellant regarding applicability of CIS to the time sharing business.
46. Applying the ratio of M.I. Builders P. Ltd. and Maharshi Dayanand University to the facts of present, we will note that the Respondent itself did not take any action against the Appellant till 2013 as SEBI was not sure whether such Time 23 Sharing Scheme of a Club and Members would come within the ambit of CIS or not. However, it changed its mind thereafter and started investigating a couple of such schemes including the Rose Valley matter. SEBI may be within its right to change its stand on the interpretation of law after a lapse of more than a decade and such a change may not hold to be illegal and bad only on the ground of the principle of estoppel. We will, therefore, repel the contention of the Appellant on this count. But the crucial point to be considered is whether SEBI is entitled to change its stand by taking a somersault and suddenly pass an adverse order with serious civil consequences without affording an opportunity of being heard to the affected person.
55. To sum up, in the present case, Appellant has been knocking on the doors of SEBI since 2001 by seeking its decision on the question as to whether the time sharing business carried on by the Appellant is covered under CIS or not. Although no formal order was issued in the year 2001, it is now admitted by counsel for SEBI that since the very beginning SEBI was of the opinion that time sharing business is not covered under CIS. In fact, in the year 2010, SEBI once again scrutinized the documents relating to the business carried on by the Appellant and it is evident from the letter addressed by SEBI to a Member of Parliament (MP) on October 21, 2013 that even after scrutiny of documents furnished by Appellant in the year 2010 SEBI was of the opinion that the time sharing business carried on by the Appellant was not covered under CIS. However, on the basis of letter addressed by the said MP, SEBI decided to reconsider the issue.24
From the impugned ex parte interim order it is seen that the basis for such order, is the letter addressed by a Member of Parliament, the Economic Offences Wing etc. Since the dispute relates to the schemes that were floated by the Appellant during the period when SEBI had considered that the time sharing business was not covered under CIS, WTM of SEBI ought to have appreciated that it would be improper to pass any adverse ex parte order against the Appellant on the basis of his prima facie opinion derived from the letters addressed by a Member of Parliament and certain agencies, especially when prima facie opinion of the Gauhati High Court is to the effect that time sharing business is not covered under CIS...".
24. In the light of the aforesaid, we are further of the opinion that the violation, if any, at the end of the day by the Company was that the scheme which was a Collective Investment Scheme was required to be registered under the CIS Regulations read with Section 12(1B). The penalty, if any, for non-compliance of this provision is under Section 15D(a). For facility, the said provision is extracted hereunder:
"15-D Penalty for certain defaults in case of mutual funds.-25
If any person, who is -
(a) required under this Act or any rules or regulations made thereunder to obtain a certificate of registration from the Board for sponsoring or carrying on any collective investment scheme, including mutual funds, sponsors or carries on any collective investment scheme, including mutual funds, without obtaining such certificate of registration, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh for each day during which he sponsors or carries on any such collective investment scheme including mutual funds subject to a maximum of one crore rupees."
25. In the instant case the show cause notice alleges violation of the CIS Regulations and penalty to be imposed under Section 15HA. For facility, the same is extracted hereunder:
"15HA.Penalty for fraudulent and unfair trade practices.-
If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty not exceeding which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher."26
26. Penalty under Section 15HA can be imposed if a person indulges in fraudulent or unfair trade practices. We have already held that the appellant has not indulged in fraudulent and unfair trade practice and, therefore, no penalty under Section 15HA could be imposed.
27. In the light of the aforesaid, the impugned order in so far as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed. Attachment orders, if any, on the appellant's demat account, bank account etc. shall be lifted forthwith. All the misc. applications are also accordingly disposed of. In the circumstances of the case parties shall bear their own costs.
28. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the 27 registry. In these circumstances, this order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email.
Justice Tarun Agarwala Presiding Officer Justice M.T. Joshi Judicial Member RAJALA Digitally signed by RAJALAKSHMI 2.3.2022 KSHMI H HDate:
NAIR 2022.03.03 RHN NAIR 17:25:13 +05'30'